Question

A) ABC Ltd. is setting the price for a new product, using cost-plus pricing. Variable costs of production for this product are estimated to be $1,000 per unit, and overheads of $200 per unit will be allocated to the product. The company wants to achieve a 50% profit margin on costs (50% markup). What selling price should ABC set? |

B) In Part A , ABC Ltd. assumed that sales volume for the new product would be 10,000 units in the first year. In fact, ABC manages to achieve sales volume of 15,000 units on the product. As a result, does it achieve a higher or a lower profit margin than expected on this product? |

Answer #1

Smart Stream Inc. uses the product cost method of applying the
cost-plus approach to product pricing. The costs of producing and
selling 10,000 cell phones are as follows:
Variable costs per unit:
Fixed costs:
Direct materials
$150
Factory overhead
$350,000
Direct labor
25
Selling and administrative expenses
140,000
Factory overhead
40
Selling and administrative expenses
25
Total variable cost per unit
$240
Smart Stream desires a profit equal to a 30% return on invested
assets of $1,200,000.
a. Determine the...

Exercise 23-15 Product pricing using variable costs LO P1
Rios Co. makes drones and uses the variable cost approach in
setting product prices. Its costs for producing 26,000 units
follow. The company targets a profit of $306,000 on this
product.
Variable Costs per Unit
Fixed
Costs
Direct
materials
$
76
Overhead
$
676,000
Direct labor
46
Selling
311,000
Overhead
31
Administrative
291,000
Selling
21
1. Compute the variable cost per unit.
2. Compute the markup percentage on variable cost.
(Round...

Hummingbird Company uses the product cost concept of applying
the cost-plus approach to product pricing. The costs and expenses
of producing 25,000 units of Product K are as follows:
Variable costs:
Direct materials
$2.50
Direct labor
4.25
Factory overhead
1.25
Selling and administrative expenses
0.50
Total
8.50
Fixed costs:
Factory overhead
$25,000
Selling and administrative expenses
17,000
Hummingbird desires a profit equal to a 5% rate of return on
invested assets of $642,500.
a. Determine the amount of desired...

Freddy D’s is setting a selling price on a new product using the
absorption costing approach to cost-plus pricing.
Unit Year
Direct material
$29
Direct labor
$20
Variable manufacturing overhead
$8
Fixed annual manufacturing overhead
$120,000
Variable selling and administrative expense
$3
Fixed annual selling and admin expense
$16,000
Freddy D’s Manager Nick plans to produce and sell 4,000 units
annually. Freddy D’s new product will require an investment of
$643,000 and have a required return on investment of 20%....

Product Cost Concept of Product Pricing
Willis Products Inc. uses the product cost concept of applying
the cost-plus approach to product pricing. The costs of producing
and selling 3,000 units of medical tablets are as follows:
Variable costs per unit:
Fixed costs:
Direct materials
$114
Factory overhead
$120,000
Direct labor
42
Selling and admin. exp.
39,000
Factory overhead
35
Selling and admin. exp.
29
Total
$220
Willis Products desires a profit equal to a 20% rate of return
on invested...

Product Cost Concept of Product Pricing
Willis Products Inc. uses the product cost concept of applying
the cost-plus approach to product pricing. The costs of producing
and selling 3,000 units of medical tablets are as follows:
Variable costs per unit:
Fixed costs:
Direct materials
$114
Factory overhead
$120,000
Direct labor
42
Selling and admin. exp.
39,000
Factory overhead
35
Selling and admin. exp.
29
Total
$220
Willis Products desires a profit equal to a 20% rate of return
on invested...

The pricing strategy that begins with the determination of a
price at which a product will sell and then focuses on developing a
cost structure for the product that will yield a profit is known
as:
cost-plus pricing.
prestige pricing.
Developmental pricing
target costing.
Chester Company plans to introduce a new product. A market
research specialist claims that 20,000 units can be sold at a $100
selling price. Assuming the company desires a profit margin of 22%
of sales, what...

Variable Cost Concept of Product Pricing
Voice Com, Inc., produces and sells cellular phones. The costs
of producing and selling 5,000 units of cellular phones are as
follows:
Variable costs:
Fixed costs:
Direct materials
$ 95
per unit
Factory overhead
$235,500
Direct labor
44
Selling and admin. exp.
82,750
Factory overhead
29
Selling and admin. exp.
22
Total
$190
per unit
Voice Com desires a profit equal to a 15% rate of return on
invested assets of $665,000.
Assume that...

Variable Cost Concept of Product Pricing
Willis Products Inc. uses the product cost concept of applying
the cost-plus approach to product pricing. The costs of producing
and selling 7,000 units of medical tablets are as follows:
Variable costs per unit:
Fixed costs:
Direct materials
$109
Factory overhead
$266,000
Direct labor
40
Selling and admin. exp.
91,000
Factory overhead
34
Selling and admin. exp.
27
Total
$210
Willis Products desires a profit equal to a 25% rate of return
on invested...

Problem Data
XYZ Co. uses the product cost
concept of applying the cost-plus approach to product pricing. The
costs of producing and selling 10,000 units are as follows:
XYZ desires profit equal to a
30% rate of return on invested assets of $1,200,000.
Variable Costs per unit:
Fixed costs:
Direct materials
$
150
Factory Overhead
$ 350,000
Direct labor
25
Selling & admin. expense
$ 140,000
Factory overhead
40
Selling & Admin expense
25
Total
$
240
Calculations
1. Compute...

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